Increased regulatory scrutiny and rising loan standards are forcing private credit managers to rethink how they value illiquid assets. Selin Bucak reports…
Sovereign credit ratings have come under increased scrutiny from both investors and regulators raising concerns about how this is done. Last month, the Financial Conduct Authority (FCA) in the UK not only warned about the collapse of trust, the Department of Justice in the US opened an investigation into a large business development company (BDC).
Meanwhile, a series of write-ups have revealed how quickly illegal loan grades can move under pressure. As asset managers squeeze private credit into marketable and semi-liquid wraps, the question of how these assets are measured, and how often, is no longer an industry-push task.
According to Lora Froud, a partner at Macfarlanes, managers are responding by making their appraisal processes more transparent and improving the ability to assign day marks.
“The biggest trend we are seeing is that managers continue to do their appraisal work professionally, which leads to more frequent, rigorous and transparent appraisals,” he said.
Froud cites four drivers: regulatory concerns over old valuations, lower costs from new analytical platforms, the creation of internal analytical teams hired from third-party providers, and recent price volatility in less liquid and open currencies.
“Together, these developments provide better power, increase accuracy, and lower costs to set net asset value (NAV) consistently and robustly,” he explains.
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BlackRock TCP under the spotlight
In May 2026, Bloomberg reported that the US Attorney’s Office for the Southern District of New York (SDNY) is investigating how BlackRock TCP Capital, a listed BDC, valued its improper loans. The investigation has been going on for months and it is reported that it involves the inquiry managers. BlackRock has never been accused of wrongdoing, and an active investigation does not necessarily lead to charges. But it underscored long-standing concerns that managers would be motivated to hold debt at inflated values, because both their reported performance and earnings depend on those marks.
This was not a problem in closed entities, where the paper benefits have limited weight because the managers receive their interest only when the assets are realized. But the rise of evergreen cars that charge money with growing NAV has changed the calculation.
In November 2025, SDNY US Attorney Jay Clayton said he was concerned about how firms value private assets, adding that “people should know that financial regulators and the department are looking at those”.
Elsewhere, MSCI data released in May showed that more than 10 percent of loans held by private funds had been written down by half or more, with marketing at a post-Covid high. Small debt funds are under a lot of pressure, as 13 percent of their holdings are now held at less than half their face value.
Read more: Semi-liquid properties: a double-edged sword
The pressure point of a semi-liquid
The semi-liquid and evergreen part is where the pressure is most noticeable. According to Froud, funds that use NAV-based subscription and redemption instruments need a transparent and strict valuation policy to assure investors that the NAV reflects the underlying quality of the assets.
As he puts it, “uncertainty about how the NAV is set and whether it accurately reflects the quality of the underlying assets may lead to price volatility and a higher discount to the NAV than appears to be the case based on mere dishonesty”.
Pressure to achieve common grades is also coming from UK defined pension schemes, which are investing in private debt for the first time, often through unit-linked insurance products that require a daily NAV. According to Froud, managers already check shadow NAVs daily using the same methodology used in quarterly valuations.
According to Richard Olson, managing director in Alvarez & Marsal’s valuation services group, the move to retail has brought about a new revolution in the property sector.
“The recent rapid increase in private debt financing to include retail investors has brought a whole new set of capital sources, but also capital problems, both from a regulatory perspective and asset inflows and outflows,” he said. “You’ve already seen it within BDCs in the US.”
Olson also added that the bar is higher for open-ended vehicles like ELTIFs, where protection for retail investors adds an extra layer of scrutiny.
“From our perspective, we consider that to be a high-risk involvement, so there’s more scrutiny, more time spent as we go through that analysis,” he explains.
He added that for some vehicles the measurements are already done daily, but it still includes any information available.
“It’s only as good as the incoming information. You’re probably very close to real price support if the NAV is built and calculated correctly,” Olson said.
The FCA and the Bank of England both monitor rates
The FCA has listed private equity markets as a priority for supervision by 2025 and, in March, published the findings of its multi-company review of rating practices. The review included 36 managers who used around £3tn in private assets between them. It flagged review committees with a poor record of how they reached decisions; conflicts of interest mapped only to narrow cost-related criteria; the measurement groups were not sufficiently independent of the agreement groups; and the lack of formal frameworks for re-marking goods between planned cycles when something happens.
According to Froud, the FCA has raised specific concerns about whether the management has the necessary expertise and the right composition in the analysis and risk committees to ensure effective control, professional challenge and independence. He added that the FCA found that conflict of interest policies were “general and lacked sufficient detail”.
The Bank of England’s second System-Wide Exploratory Scenario (SWES) announced in December 2025, includes a wide range of benchmarking procedures and is expected to publish its findings in early 2027.
According to Froud, “it is difficult to imagine a situation in which this discovery does not immediately call for a great disclosure”. He added that any new commitments must be proportionate and should not put the UK at a competitive disadvantage.
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The best way it looks
According to Olson, strong measurement begins with measurement. “You want to start from a collection of rating data points,” he said, pointing to initial underwriting distributions, refinancing events and any new services as benchmarks against which subsequent ratings can be assessed.
The aim, he says, is to “synchronize as many data points inside and outside the company as possible”, especially when the same debt is held across multiple funds.
Olson explains that when the same debt is sitting in two funds with the same manager, the rating teams now look at the ratings by position to check that they are treated the same way.
He notes that different grades within the specified range may be allowed by waterfall agreements, different intellectual property rights or different positions in the capital structure – factors that are not always disclosed in the market.
Valuation questions have been particularly difficult for software businesses that cannot be disrupted by AI.
Mike Beadle, managing director in the credit advisory team at Alvarez & Marsal, says there is a lot of focus on businesses affected by AI when it comes in.
“Being able to help lenders understand why your business benefits from AI, in a compelling way, is something that is at the forefront of most businesses,” he said. “Lenders themselves are building AI tools internally to understand the risk they’re taking on all their existing and new investments.”
As private debt moves deeper into retail and pension portfolios, moderation becomes more important. The challenge for managers now is not just to prove that their grades are accurate, but that investors can trust how they are achieved.
